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Wednesday, October 26, 2011

Bull vs Bear for a Confused Market

BULL CASE

Structure – 5 wave rise è Wave 1 of 3

Following chart shows a clear 5 wave structural rise since Oct 20, 2011 bottom. 5 waves are usually followed by 3-wave corrections, like the one we are seeing right now. Moreover, market traced out a triangle during today’s decline. This suggests that we are in the final thrust lower of 2nd wave down. Once this correction is complete, market will start rising again.

Wave Relationship: Wave a = Wave c: 1220 (SP500), 61.8% retracement of Wave 1 move up from 1197 to 1254: 1220. Therefore, 1220 level possesses strong support for the market. If the market declines below 1197, it would suggest that we have topped and will decline sharply (look at the Bear Case).

Time: Today is the IPM turn date. Under such time based circumstances, it is a possible that market might bottom early tomorrow and then start a new rally phase (while still in the turn window).

Trend: One of the most important aspects of trading is the trend and right now, trend is up on all levels. We have regained the Bull Market status, uptrend has been confirmed by the 8/4 test, and we are in an uptrend even on shorter time-frame.

Sentiment: Today everyone on the TV was talking about the possibility of disappointment from Europe. This kind of behavior along with pessimistic readings from sentiment surveys suggests that we are closer to the bottom than to the top.

Indicators: Some of the technical indicators like NYSE stocks above 50DMA, TICK (10 DMA), NYAD (10 DMA) and others are showing incredible strength. Suggesting that current rally is not just a bear market rally, rather something more significant or at least long lasting.

Currencies: Currencies (EUR, AUD, GBP) are supporting patterns that portend a weaker dollar in the near future. Weak US dollar is good for the stock market

BEAR CASE

Structure – 3 Wave rise complete

Following chart shows the possibility of a completed 3 wave rise since October 4 low. Furthermore, the 2nd wave retraced 61.8% decline of the 1st wave down 1370s to 1070s (a common Fib relationship). This pattern would suggest that we will start declining in the 3rd wave down - one of the strongest down moves.

Although this pattern can result in a sharp decline, it is just too good to be true. With everyone looking at Europe and blogosphere filled with the 61.8% retracement information, it seems like a little too obvious stopping location.

Time: Since today was the IPM turn date, it might be possible that market topped out yesterday and is about to decline sharply. This is probably the strongest argument in favor of a continued decline.

Sentiment: Sentiment did get a little frothy, but it is nowhere close to a market top. However, one should keep in mind that sentiment does not get very optimistic when in a bear market. In the event, we would like to mention that we are not in a bear market – at least by our measures.

Indicators: Very few indicators are indicating bearish divergences. This does not support a sharp decline.

Trend: Trend is up, so UST will not undertake a counter-trend short trade before market reversal from up to down - market breaks below 1210 and 1197.

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